The impact of tax increases is weaker than expected! The decline in UK employment data for July unexpectedly narrowed, and the balance for the central bank to cut interest rates is once again swaying

According to the latest data obtained by Zhitong Finance APP, the UK labor market may have passed its most difficult period—last month's decline in employment was smaller than expected, a sign that complicates the Bank of England's interest rate cut decision. The UK Office for National Statistics reported that employment fell by 8,353 in July, the smallest decline since January this year. This may provide some relief to Chancellor of the Exchequer Rachel Reeves: since the implementation of tax increases and a significant rise in the minimum wage in her first budget last October, the total number of jobs in the UK has decreased by 165,000, with both policies taking effect in April this year. The decline in July was not only smaller than the 20,000 expected by economists, but data released on Tuesday also revised down the unemployment figures for previous months. However, this puts the Bank of England in a dilemma: on one hand, inflation is rising again, while on the other hand, signs of economic deterioration are becoming increasingly evident. The signs that the labor market has been less impacted undoubtedly make this decision more challenging. Data expected to be released on Thursday is projected to show a significant slowdown in the UK's economic growth in the second quarter, with the Gross Domestic Product (GDP) growth rate dropping to 0.1%. Last week, the Bank of England decided to cut interest rates by 25 basis points by a narrow margin (the Monetary Policy Committee conducted an unprecedented two rounds of voting), and the weak labor market was one of the key reasons for the rate cut. However, policymakers are also closely monitoring wage pressures, as private sector wage growth has once again slowed. After the data was released, the pound regained some of its earlier slight losses. Market expectations for interest rate changes also did not show significant changes, with traders believing that the likelihood of a rate cut in November is less than 50%. Thomas Pugh, Chief Economist at RSM UK, stated: "The positive trend in the labor market at the beginning of summer has significantly reduced the likelihood of a rate cut in November. Overall indicators suggest that the labor market may have begun to stabilize, although it remains at a relatively weak level." As businesses face rising labor costs amid sluggish economic growth, labor-intensive sectors such as retail and hospitality have been particularly hard hit. Now, companies are not only worried that the next autumn budget may impose further tax increases, but they are also uneasy about the impact of employment rights legislation and the potential further increase in the minimum wage next year. The UK Office for National Statistics stated that the unemployment rate remained at a four-year high of 4.7% for the three months ending in June, while private sector wage growth, excluding bonuses, slightly decreased from 4.9% to 4.8%. In recent months, significant revisions to employment data show that the impact of Labour Party policies is far less than initially feared. For example, the decline in employment in June was revised down from an initial estimate of 41,000 to 26,000. The cumulative decrease of 165,000 since last October is also narrower than the 276,000 decline estimated by the UK Office for National Statistics a few months ago, indicating that the impact of the policies is weaker than expected Dan Hanson, Bloomberg's Chief Economist for the UK, stated: "There are preliminary signs that the pace of loosening in the labor market may be slowing. If evidence of improvement emerges, the likelihood of the Bank of England maintaining interest rates unchanged in 2025 will increase." It is worth noting that recent employment data on both sides of the Atlantic have undergone significant revisions, which not only obscures the overall picture of the labor market but also makes it more difficult for the Bank of England and the Federal Reserve to decide whether to continue cutting interest rates. Additionally, this situation led to President Trump firing the head of the U.S. Bureau of Labor Statistics. The employment report released by the UK on Tuesday also showed that in the three months ending in July, the number of job vacancies was 718,000, a decrease of 44,000 from the previous quarter and a decrease of 77,000 from pre-COVID levels; excluding bonuses, the overall wage growth rate remained unchanged at 5%, far above the level that the Bank of England considers consistent with its 2% inflation target; the regular wage growth rate adjusted for Consumer Price Index (CPI) inflation fell to 1.5%, the lowest level in three months ending in November 2023. This indicates that as inflation rebounds and wage growth slows, the recovery of real income is weakening; in the three months ending in June, the number of "inactive population" (those neither employed nor seeking work) in the working-age population decreased by 156,000. This kept the inactivity rate at 21%, the lowest level since early 2020 before the pandemic; in the second quarter, the number of layoffs per 1,000 employees was 3.6, down from 3.9 in the three months ending in May.